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World Week Ahead: Debt talks to dominate

Monday 21st November 2011

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There is simply no let-up in the uncertainties surrounding the fiscal crisis of the European Union, and the US debt situation is about to be thrown back into the mix too.

First though, Italy’s new Prime Minister Mario Monti will meet with his counterparts in Germany and France as investors push yields on Italian bonds to what many consider the point of too high a return for those making the payments.

Unless Italy moves fast on EU prescribed reform efforts, the cost of borrowing funds will push the country into the same waters as Greece, Ireland and Portugal. Spanish voters may be hoping that the weekend election will help avert even more tough times.

Without concrete action however, investors will remain wary and prone to trading on scenarios real or imagined.

“Until we have some sense of stability in Europe, the volatility will continue,” Mark Bronzo, who helps manage US$24 billion at Security Global Investors in Irvington, New York, told Bloomberg. “Better economic growth in the US will provide support for the markets and potentially set the stage for a nice rally if and when Europe does stabilise.”

A recent slew of data pointing to better-than-anticipated strength in the US economy - including a jump in the index of leading indicators released on Friday - has prompted several analysts to raise their growth forecasts.

Economists at JPMorgan in New York now see US gross domestic product rising 3 percent in the final quarter, up from a previous prediction of 2.5 percent, according to Bloomberg. Macroeconomic Advisers in St. Louis increased its forecast to 3.2 percent from 2.9 percent at the start of November, while New York-based Morgan Stanley boosted its outlook to 3.5 percent from 3 percent.

While the economic news on Friday helped to limit losses, it wasn’t enough to propel equities forward for the week. The Standard & Poor’s 500 Index last week suffered its biggest weekly plunge in two months, shedding 3.8 percent.

This week US markets are closed for the Thanksgiving holiday on Thursday, which will likely dampen the week’s trading volume. Traditionally, many traders take Friday off to extend the weekend into four days.

But just before Americans head out the door, the 12-member “super committee” of Republicans and Democrats will reach their midnight Wednesday deadline for striking a deal intended to check the US government’s deficit. At this point, it’s still too early to predict whether a deal will be reached.

Failure to reach a deal might result in automatic reductions of 10 percent for every federal agency, and that would hamper the nation’s fragile recovery, according to Reuters.

On the economic front, there also will be data this week on existing home sales for October, durable goods orders, personal income and outlays and weekly jobless claims.

In Europe the focus is more on the dichotomy between the euro zone’s key members than anything else. France is pushing for the European Central Bank to do more, while Germany wants the onus to be squarely placed on individual governments.

Some investors side with the French on this one, given how aggressive central banks in the US and the UK have been in buying their respective national debt to bolster liquidity.

“The ECB remains the only institution that can credibly counter a collective loss of confidence on such a scale,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, told Bloomberg. “Yet the longer its intervention in the bond markets of Italy and Spain remains limited and intermittent, the greater the risk that the crisis will escalate further.”

As the Italians, Spanish and French saw their bond yields rise, there is concern at least among the Germans that they could be dragged much further into the mess.

"There has been heavy selling by Asian real money investors in Bunds the last few days," Chuck Retzky, director of the futures division of Mizuho Securities USA in Chicago, told Reuters.

"The Bund market is considered to be one of the safe havens for investors' money in the world and if that should show a significant crack and the selling pressure continues, then people will worry if US Treasuries will see a similar selloff in the future."

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